Leading academics call for a revolution in financial regulation

Several leading academics are calling for a new approach to financial regulation based on simple legal frameworks, rather than the current obsession with complex, detailed specifications. They set out their arguments in detail in the latest edition of the IEA’s journal Economic Affairs “Financial Regulation: the need for a revolution” (vol. 32, No.3).

Writing in today’s edition of The Times the same authors argue:

Preamble

The public's objective is for a sustainable financial services industry. There is currently no debate on available ways to achieve that objective other than through massive regulatory intervention. There is little evidence that this is the only or best way to achieve this objective. Indeed, there is substantial evidence available that this approach will not be successful and that alternative routes may be preferable.

Statement

1. Financial regulation has run riot in recent years to the detriment of the industry and its customers. For example, last year alone there were 14,200 new banking regulations worldwide and the US Dodd Frank Act will contain around 30,000 pages of regulations.

2. We need an entirely new approach to regulation across the financial sector which is based on transparency, market discipline and simple and stable legal frameworks within which financial institutions can operate. This approach was successful historically in the UK.

3. The approach to banking regulation being followed by governments worldwide is too complex, as well as being dangerous and unnecessary. Instead, a legal framework should be created whereby banks can fail safely and deposit insurance should be abolished.

4. Accounting standards regulations have become extraordinarily complex and have replaced professional judgement with damaging consequences – including during the financial crash.

5. The inflexible regulation of company pension schemes has contributed significantly to their widespread closure as well as to short-termism and herding behaviour amongst investors. Perversely, regulation designed to protect members has led to the replacement of relatively safe defined benefit schemes by much more risky arrangements.

6. Securities markets do not need to be closely regulated by government institutions and the coming EU Directives on alternative investment funds will be deeply damaging.

7. The forthcoming EU Solvency II insurance regulations should be scrapped. In their present form they will be damaging for insurance companies and for the wider economy. Even worse, Solvency II may lead to financial contagion and sow the seeds of future crises.

8. The current approach to developing the Single European Market in both insurance and banking is flawed. Instead, regulation should be returned to member states so that those states that wish to liberalise regulation can do so. Banks and insurance companies should, if member states desire, be required to set up subsidiaries in different EU countries. This will require a strengthening of the European Court of Justice’s oversight to ensure that individual government regulation does not prove an impediment to trade. It will also require radical reform of single market regulation.

· Professor Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs and professor of insurance and risk management at Cass Business School, City University

· Ivan Chen – Researcher at George Mason University

· Professor Laurence Copeland, Professor of Finance at University of Cardiff and previously Chair of Finance at the University of Stirling

· Professor Ranald Michie, Professor of Economic History at the University of Durham

· Professor Alan Morrison, Professor of Finance at Saïd Business School, University of Oxford, and a Fellow of Merton College

· Professor D.R. Myddelton is Emeritus Professor of Finance and Accounting at Cranfield School of Management

· Edward Peter Stringham, associate Professor of Economics at San José State University

· Dr Amarendra Swarup, formerly a partner at Pension Corporation and finance fellow at the Institute of Economic Affairs

Notes to editors

To arrange an interview on this subject or to receive a copy of the journal Economic Affairs “Financial Regulation: The need for a revolution” (vol. 32, No.3), please contact Stephanie Lis, Communications Officer: slis@iea.org.uk[2] or 07766 221 268.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.